Crude oil prices sneak up on inflation

The news of US banks crashing and the current outbreak of inflation have overshadowed the benefits of tumbling crude oil prices. First, let's look at inflation.

This is the main stumbling block for a benign monetary policy, which is a key driver for economic and corporate growth, and which will eventually lead to better trends in the stock markets.

The present government's key concern is the unabated advance of inflation, which it is trying to control with diverse measures. These include a hawkish monetary policy, increasing interest rates, and banning or curbing various commodity exports. Although such steps may bring a temporary reprieve, they will impact corporate sales and earnings, which is not good for the stock markets.

Although the present inflationary trend is not encouraging, we see some respite in the overall inflationary trend, due to the sharp pullback in crude oil prices to below $100 a barrel. We see a strong correlation between crude and other components forming a major part of the inflation index, because the latter are either derivatives of oil or are impacted directly or indirectly by oil prices.

What's the genesis of the current malaise? When the dotcom bubble burst in 2001, it led to a benign interest rate regime worldwide, aimed at boosting economies that were slowing down. That's what we consider the root cause of the inflation malady.

Readily available and easily accessible funds for consumers encouraged accelerating consumption of products and services . World GDP, which had been cruising at about three per cent for a decade up to that point, was propelled to five per cent over the next few years, thereby constraining the supply side.

In tandem with this demand, prices of metals such as steel, copper, and aluminium soared by 20 to 50 per cent. When oil peaked at $147 per barrel, the price of crude had risen year-on-year by 103.5 per cent. Our systems, which are not geared for this kind of growth, succumbed to this higher demand, giving rise to inflationary pressures in the subsequent years. Our government was left with no option but to intervene.